Asian stocks end lower as yuan hike's effect fades

V.Phani Kumar

ShriNavaratnam

Wei-ZheTan

HONG KONG (MarketWatch) -- Asian shares ended mostly lower Tuesday on doubts over the pace at which the Chinese yuan can appreciate and after Monday's weak close on Wall Street.

Resource-linked shares and exporters were broadly lower.

Concerns over Europe also resurfaced after Fitch Ratings on Monday downgraded French banking giant BNP Paribas to AA- from AA.

"Investors have welcomed a move from the People's Bank of China to allow the yuan to appreciate against the U.S. dollar," said David Taylor, market analyst at CMC Markets in Sydney. However, "given that a lot of China's news was factored into our market [on Monday], and BNP Paribas managed to spook Wall Street overnight, we could see some risk aversion returning to our market," he said.

Regional markets and currencies had risen sharply in the previous session on expectation China's move to remove the yuan's de-facto peg to the U.S. dollar would support growth in its domestic consumption and in turn, increase exports from other Asian countries.

"Some people are even talking about a 5% to 10% appreciation [in the yuan] over a six-month period. That's just way too bullish. And this sentiment may lead to overreaction in the market," said Jun Ma, chief economist for the Greater China region at Deutsche Bank.

But Mr. Ma added that despite the volatility, the yuan would trend higher against the U.S. dollar. He expects the currency to rise about 3% against the dollar over the next 12 months, and appreciate by about 3% to 4% per year over the next three to four years.

The yuan reversed some of its gains from the previous session on Tuesday, with the U.S. dollar rising to 6.7999 yuan from 6.7906 yuan, although China fixed the day's dollar central parity at 6.7980 yuan Tuesday, from 6.8275 yuan on Monday. Traders in Asia said several Chinese banks were behind the dollar buying against the yuan, amid speculation that the Chinese central bank could be encouraging buying to reinforce the perception that its latest promise to increase the yuan's flexibility means two-way fluctuations.

The Tokyo market suffered broad-based losses, with commodity plays such as trading houses dropping on profit-taking after Monday's rise, which was spurred by hopes of increased demand from China following the weekend's yuan news. "But the Nikkei will likely be supported above 10,000 as investor confidence is back," said Hikaru Sato, senior technical analyst at Daiwa Securities Capital Markets.

Materials and financial shares dropped in Sydney as the initial positive reaction to the lowering of the dollar/yuan central parity subsided.

BHP Billiton
BHP, -1.77%
(BHP) dropped 0.6% and MacArthur Coal (MCC)
MACDY
lost 4%, while National Australia Bank (NAB)
NABZY, -0.32%
gave up 1.2%. Shares of Elders
EDESY, +596.06%
dove 46% after the company downgraded its earnings outlook to a fiscal year underlying loss of 8 million to 14 million Australian dollars ($7.04 billion to $12.32 billion), from its previous forecast of a A$55.7 million profit.

China stocks reversed earlier losses as expectations for a stronger yuan continued to drive investor demand. "The market may be cooling off slightly after yesterday's knee-jerk rise, so while there is still some buying because of the currency move, investors will start to scrutinize which firms will benefit more from a stronger yuan, and when their balance sheets will reflect that," said Peng Yunliang, an analyst from Shanghai Securities.

Elsewhere, New Zealand's NZX 50 dropped 0.5% and Philippine shares gave up 0.2%. Indonesian shares slid 0.3% and Thailand's SET Index slipped 0.1% by late afternoon.

In currency trading, the euro was buying $1.2312 from $1.2320 late Monday in New York, and 111.74 yen from 112.15 yen. The dollar was fetching 90.75 yen compared with 91.04 yen.

"The PBOC decision provided a welcoming [short-term] distraction in a market gripped by fear and anxiety, but the underlying European fiscal headaches and global growth uncertainties remain unaltered. The [fiscal] sword of Damocles remains as threatening as ever," RBC Capital Markets said in note.

Other Asian currencies also pulled back after briefly rising on Tuesday's yuan parity fix. Most of the regional currencies had risen sharply Monday after Beijing's weekend yuan announcement.

The Australian dollar was at $0.8781 from $0.8835 late in Sydney Monday, while the Korean won was a tad weaker with the dollar at 1,181.95 Korean won from 1,172.0 won late Monday in Seoul.

Lead Japanese government bond futures were up 0.34 at 140.82 points, led higher by the Nikkei's losses. The 10-year cash JGB fell 2.5 basis points to 1.190%.

Spot gold was at $1,239.30 per troy ounce, up $6.70 from late New York trade on Monday. July Nymex crude-oil futures lost 64 cents at $77.18 per barrel on Globex.

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